Rite Aid loses IRS case, owes $10.4 million; Taxes

THE BALTIMORE SUN

Rite Aid Corp., the No. 3 U.S. drugstore chain, lost its challenge to Internal Revenue Service rules banning deductions for certain losses from sales of subsidiaries.

The Court of Federal Claims in Washington last week denied Rite Aid's attempt to deduct a $22 million loss from a 1994 sale of stock in a subsidiary known as Penn Encore Inc., a small discount bookstore chain.

The denial cost Rite Aid $10.4 million in taxes.

Robert Willens, managing director at Lehman Brothers Inc. in New York, estimated that the ruling would affect more than 100 companies and the money at stake is "certainly in the billions."

The case was a major legal victory for the IRS and its "loss disallowance rules" that the agency says are designed to crack down on companies generating artificial losses through accounting gimmicks.

Rite Aid sued the IRS in 1998, claiming denial of the $10.4 million refund was erroneous and illegal.

Court of Claims Judge Emily C. Hewitt in Washington said Rite Aid "had an opportunity, which they did not avail themselves of, to structure the sale" in a way that would have allowed Rite Aid to recognize the losses.

A Rite Aid spokeswoman did not have an immediate comment on the court case.

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